Despite Oil Boom, Mexico Budget Is Frugal

The Mexican government said its 1991 budget, submitted to congress Thursday, reflects its commitment to conservative fiscal management. Despite the windfall from the Persian Gulf crisis, the $70-billion budget is based on oil selling at half the current price.

The price of oil, which accounts for one-third of the government’s income, has skyrocketed since August. It is now selling for about $34 a barrel on world markets. However, Mexico will not change its policy of economic austerity, Finance Minister Pedro Aspe said.

“We prefer to be prudent and not risk our economic program based on unpredictable, outside economic factors,” Aspe told the Mexican Congress, which will vote on the budget next week.

“The increase in oil prices will undoubtedly benefit exporting countries,” he said. “However, recent history has taught us that these types of benefits are generally ephemeral.”

Mexico is eager to project an image of fiscal restraint at a time when it is preparing to negotiate a free-trade agreement with the United States that will tighten the countries’ economic ties. A recurring theme when Mexican business people discuss the upcoming talks is their country’s reliability and sense of responsibility in a trade partnership.

The budget increases spending by 5%. But, after adjusting for a projected inflation rate of 15% next year, the government said the budget will actually be 5% lower than last year.

In addition, debt service has dropped dramatically--from 44% of 1988 spending to one-fourth of next year’s budget, in part because of an agreement with foreign commercial banks to reduce Mexico’s debt. With less debt service to pay, the government has budgeted a 16% increase in spending on development programs, such as education and health care--to $20 billion.

The budget contrasts sharply with free-spending policies during the last oil boom. In 1976, President Jose Lopez Portillo embarked on an ambitious development program, borrowing heavily based on earnings from oil exports. Mexico exports about half its oil production, 59% of it to the United States.

By 1981, oil prices were plunging and interest rates soaring. A year later, Mexico told its bankers that it could not make scheduled payments, setting off the Third World debt crisis.

Mexico has struggled with the developing world’s second-largest debt since then.

“Last time, we thought that high oil prices were permanent and high interest rates temporary,” said a senior government official. “It turned out to be just the opposite. This time, we have to assume that high oil prices are temporary.”

The added oil income is being used to pay off the government’s domestic debt, with its 35% interest rate. In the past four months of rising oil prices, Petroleos Mexicanos paid off its entire $1.5 billion in domestic debt.

Money from the sale of major government-owned companies--such as the telephone company, the commercial banks and the steel mills--also will be used to reduce domestic debt, the senior official said.

The cuts in interest payments could result in a balanced federal budget or even a surplus, he said. Current projections are for a slight deficit.

Economists considered the administration’s approach to the added oil revenue sensible.

“They want to take the windfall out of the budget to avoid risks,” said economist Rogelio Ramirez de la O.

However, deputies from opposition parties and maybe even those representing labor unions within President Carlos Salinas de Gortari’s own party are expected to object when the budget comes to a vote.

Mexicans have suffered eight years of rising prices and shrinking wages, and expectations are beginning to rise again, along with the oil prices. Earlier this week, the government announced increases in domestic prices of gasoline.

It also announced an 18% increase in the minimum wage, which applies to about one-third of the work force. However, inflation is expected to reach 27% this year, meaning that buying power will drop again.

Objections to the government’s plan may be moderated by a 40% tax cut for the lowest-paid workers, those earning no more than four times the minimum wage of about $4 a day.

OIL’S IMPACT ON THE MEXICAN DEFICIT

Mexico’s budget deficit has crested and ebbed with the price of oil, the country’s top export and most valuable commodity. The first chart tracks Mexico’s deficit as a percentage of its gross domestic product. The second chart shows the average annual cost of Mexican oil, in dollars, at its arrival in the United States.